News - News Releases 2019

15/11/2019 14:28:00

Central Bank of Malta Quarterly Review – Fourth Issue 2019

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2019, which analyses economic and financial developments in Malta and abroad during the second quarter of 2019. The Review carries an analysis of Malta’s public capital stock and discusses the macroeconomic benefits of bridging the public sector capital gap with the rest of the European Union. It also features a summary of a study of the distribution of income and wealth based on Household Finance and Consumption Survey data, and recent developments regarding the number and composition of foreign workers.

With regard to the latest economic developments, the Review notes that the pace of economic activity decelerated in the second quarter of 2019, with real gross domestic product (GDP) rising by 4.0% on an annual basis, following a 5.4% increase in the previous quarter. Slower growth was underpinned by weaker expansion in domestic demand as the contribution of net exports turned positive. Nonetheless, growth was four times the rate recorded in the euro area as a whole.

In the second quarter of 2019, potential output growth eased slightly. It edged down to 5.1% from 5.2% in the first quarter, but remained elevated from a historical perspective. The positive output gap, measured as a four-quarter moving average, narrowed during the quarter under review and remained well below levels seen in 2015 and 2016.

Meanwhile, the Bank’s Business Conditions Index (BCI) declined when compared with the preceding quarter. However, it continued to indicate above-average economic conditions, broadly similar to those prevailing in the last two years.

The labour market remained robust, as employment grew strongly and the unemployment rate fell further. According to the Labour Force Survey, the unemployment rate stood at 3.4% in the second quarter of 2019, lower than the 3.5% in the previous quarter and the 3.7% recorded a year earlier. In part, this reflects the robust pace of economic expansion and improved job matching in the context of a buoyant economy.

Annual inflation as measured by the Harmonised Index of Consumer Prices (HICP) accelerated to 1.8% in June from 1.3% in March, largely supported by faster growth in prices for services and non-energy industrial goods. Meanwhile, annual inflation based on the Retail Price Index (RPI), which only takes into account expenditure by Maltese residents, stood unchanged at 1.9%. By contrast, core inflation, which excludes the more volatile components of the HICP index stood at 1.3% in June. The difference between this measure and the overall rate suggests that overall inflation is partly being supported by strong increases in the prices of a small number of consumables.

Producer cost inflation, as measured by the industrial producer price index, continued to ease during the second quarter, falling to 1.6% in June from 2.4% in March. Malta’s unit labour cost index, as measured on a four-quarter moving average basis, also rose at a slower pace. Following a contraction in the first quarter, Malta’s Harmonised Competitiveness Indicators returned to an increasing path during the second quarter, signalling deterioration in Malta’s international competitiveness.

The surplus on the current account of the balance of payments increased when compared with the corresponding quarter of 2018, mostly reflecting larger net services receipts and a smaller merchandise trade gap. When measured as a four-quarter moving sum, the current account balance was equivalent to 9.8% of GDP. Hence it remained below the Bank’s measure of the cyclically-adjusted measure, which was estimated to have reached 11.6%. This indicates that Malta’s current account surplus largely reflects structural factors.

The general government surplus narrowed when compared with the corresponding period a year earlier, as a substantial increase in primary expenditure more than offset a rise in revenue. When measured as a four-quarter moving sum, the general government surplus narrowed to 1.0% of GDP from 1.8% in the first quarter of 2019. Meanwhile, general government debt as a share of GDP declined to 45.7% at end-June. However, Government’s net worth decreased, as a considerable increase in the stock of financial assets held by government was offset by an even larger increase in financial liabilities.

Maltese residents’ deposits with monetary financial institutions operating in Malta continued to expand at a robust pace during the second quarter of 2019. Credit growth continued to pick up, reflecting a return to positive growth in credit to general government and continued strong growth in credit to other residents. Loans to households for house purchase rose at a faster pace, while lending to non-financial corporations remained strong. According to the Bank’s Financial Conditions Index (FCI), financing conditions were marginally tight from a historical perspective, in contrast to broadly neutral conditions in the first quarter of 2019.

The Review presents an overview of the latest monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). During the second quarter of 2019, the Council continued with its accommodative monetary policy stance. The interest rates on the main refinancing operations (MRO), the marginal lending facility and the deposit facility remained at 0.00%, 0.25% and -0.40%, respectively. In June, the Council announced that key ECB interest rates are expected to remain at present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation at levels below but close to 2% over the medium term. Subsequently (on 12 September), the Governing Council reduced the interest rate on the deposit facility by 10 basis points, to -0.50%. The Council also stated that the ECB’s key interest rates are expected to remain at current or lower levels, until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

During the second quarter of 2019, the Council reiterated its intention to reinvest in full the principal payments from maturing securities under the asset purchase programme (APP) for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Furthermore, in September, the Governing Council announced the resumption of net asset purchases, under the APP at a monthly pace of €20 billion from 1 November 2019. To support further the bank-based transmission of monetary policy, it also announced a new system for the remuneration of reserves, such that a part of banks’ excess liquidity holdings will be exempt from the negative deposit rate.

The fourth issue of the Quarterly Review for 2019 is available on the website of the Central Bank of Malta.

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